MNI Analysis: UK Data May Show Mort Rate Upward Pressure

By Jai Lakhani

     LONDON (MNI) - The Bank of England's latest M4 and lending to individuals

data may point towards an increase in quoted mortgage rates across all mortgage

products, as higher market rates and the income squeeze heighten loan risks.

     Whilst it is true that mortgage borrowing demand by households in aggregate

remains muted, there are many signs suggesting the mortgage risks being taken by

banks (especially in the 75% to 90% loan-to-value area) are becoming a concern

for regulators.

     The minutes from the Financial Policy Committee's March 12 meeting,

published Monday, pointed to the spread between 90% LTV and 75% LTV mortgage

rates falling by 34 basis points since Q1 2016. The spread is also 13 basis

points lower than in June 2009.

     There is unlikely to have been an improvement in underlying credit quality

during this time, which coincides with a period when the BoE raised rates -- the

first hike in a decade -- in November. Under normal circumstances, one would

link an increase in interest rates with an increase in the mortgage rate and a

widening, not tightening, of this spread.

     Growth in risk appetite is shown clearly in the recent narrowing of the

spread between aggregate 2-year fixed mortgage rates and the 2-year swap rate.

     Historically, these two indicators have been positively correlated and

since 2009, the median spread has been at 1.65%. A recent steepening in the swap

curve resulting from markets pricing in a May Bank Rate hike has seen this

spread fall to 0.36%. This is the lowest the spread has been since June 2008,

suggesting scope for this to narrow further is limited and mortgage rates may

need to rise. Indeed, our interpretation of the FPC stance, is that they would

not like to see a return to the pre-2008 tightness of swap-mortgage rate

spreads.

     A further point showing increased risk appetite is the flow of new

mortgages by loan-to-income (LTI) ratios. In line with the FPC's

recommendations, mortgages above 4.5 LTI have remained below 15% of total new

mortgages. However, over the past couple of years there has been a marked

increase in new mortgages with LTIs between 4 and 4.5.

     In summary, a mortgage rate increase against the backdrop of weakening

mortgage demand, and an expected fall in mortgage approvals could further

highlight pessimistic consumer sentiment. The anticipated growth in wages could

be offset to some extent by declining mortgage affordability. 

--MNI London Bureau; +44 203 865 3828; email: jai.lakhani@marketnews.com

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

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